Vodafone Lays One Hand on SFR

Vodafone Group plc (NYSE: VOD) has taken a giant step towards its goal of owning France's second largest mobile operator SFR now that BT and SBC have agreed to sell their stakes in SFR's parent Cegetel to the global mobile giant (see Vodafone Buys Up Cegetel).

Vodafone has been pursuing SFR for some time, but saw the chance to pounce when Cegetel's largest shareholder, Vivendi Universal, ran into financial difficulty earlier this year (see Vivendi Hangs On to SFR -- For Now). If successful, Vodafone would own a major operator in each of Europe's five main mobile markets -- France, Germany, Italy, Spain, and the U.K.

Vodafone already owns 15 percent of Cegetel, which owns 80 percent of SFR. Vodafone owns the remaining 20 percent in SFR directly. Now fellow Cegetel shareholders British Telecommunications plc (BT) (NYSE: BTY; London: BTA) and SBC Communications Inc. (NYSE: SBC) have accepted cash offers for their stakes in Cegetel -- €4 billion (US$3.95 billion) for BT's 26 percent stake and €2.3 billion ($2.27 billion) for SBC's 15 percent. In addition, Vodafone has offered Vivendi €6.77 billion ($6.69 billion) for its 44 percent holding in Cegetel (see table below), an offer that stands until October 30. This values Cegetel at €15.4 billion ($15.2 billion).

Table 1: Cegetel and SFR: who owns what, what Vodafone has bid
Company Current stake in Cegetel Current stake in SFR Amount VOD has offered for Ceg stake
Vodafone 15% 32% (20% direct, 12% via Ceg stake)
Vivendi 44% 35.2% via Ceg stake �6.77 billion
BT Group 26% 20.80% �4 billion
SBC 15% 12% �2.3 billion ($2.27 billion)

The only fly in the ointment for Vodafone could be Vivendi, which has until November 10 to make a counterbid for the BT and SBC stakes. A shareholder agreement means it would have to match Vodafone's bid for BT's stake but trump the bid for SBC's stake by 13 percent, pushing it up to €2.61 billion ($2.565 billion). While Vivendi's management has expressed its desire to hold on to Cegetel, it may not be in a financial position to either counterbid against Vodafone or refuse the mobile giant's offer for its stake. It has pledged to sell assets to cut its €19 billion debt pile.

Vivendi has no comment on the situation. Should the acquisition go unchallenged and pass French and EU regulatory review, the ownership would alter as shown in the diagram below.

A holder of a majority stake in SFR, which holds a 3G license for France, would have the right to appoint a majority of directors onto the SFR board. That would then allow it to bring the operator in line with its global strategy. Vodafone has more than 104 million customers through its mobile operations in 28 countries, including majority ownership of operators such as J-Phone Co. Ltd. in Japan, D2 Vodafone in Germany, Vodafone Omnitel in Italy, Vodafone Spain, and Vodafone UK on its home turf. It also has a 44.2 percent stake in Verizon Wireless in the U.S. (see Clash of the Titans). Control of a French operator that boasts about 13 million customers (about 35 percent market share with monthly average revenue per user of €39) would be a major feather in its chapeau.

"This will be a core asset for Vodafone, and a cornerstone on the road to becoming the global operator that everyone sees it can be and delivering all the [international] services it has planned," says Lars Vestergaard, research manager at IDC's European wireless program. "It is easier if you have majority control of an operator -- we have seen recently the problems minority ownership can bring with the MobilCom AG situation. Having control will allow Vodafone to impose its global strategy, and I'm sure SFR would rebrand in time [to take the Vodafone name]. Although all carriers have to be careful about how they manage their cash these days. I am sure Vodafone will be able to handle this."

Vodafone believes it can make the acquisition without affecting its credit ratings. It is rated A2 by Moody's Investors Service and A by Standard & Poor’s.

Ownership of Cegetel would also give Vodafone some fixed-line assets, including 3 million customers, and joint ownership with the French national railroad (SNCF) of Télécom Développement, France's no. 1 private long-distance operator. Would it sell these fixed telecom businesses? "No, in essence, is the appropriate response," waffles Bobby Leach, Vodafone's head of group financial media relations. "We would need to take a close look at the strengths and weaknesses before making a decision. It should be noted that we already hold fixed-line assets in Japan, with Japan Telecom, and Germany, with Arcor."

— Ray Le Maistre, European Editor, Unstrung
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